Myths of the Economy?

For many Americans, the economy is still not doing very well. Unemployment is higher than it should be and people are still facing serious concerns regarding their pay, job security, and finances.

The Obama administration has been blamed for many of the woes. This is, of course, a great American tradition. Part of this blame is fair. After all, the actions of the President certainly have some impact on the economy. However, blame should only be placed where it is deserved. Interestingly, some of what Obama is being blamed for is not actually his fault. However, the blame is placed on the basis of what can be best described as myths.

The first myth is that Obama is to blame for the loss of oil related jobs. While this does seem plausible because of the ban imposed after the BP rig blew up, it does seem to be a myth. According to the White House, 2 out of three oil and gas leases in the Gulf of Mexico are not being utilized. As such, it seems more reasonable to blame the companies who are electing not to exploit those leases. Also, there is the fact that the number of active oil rigs is now higher than during the Bush administration. If these claims are true, then it would seem that the idea that Obama is holding back big oil is not true.

The second myth is that Obama is somehow holding back hiring in some manner, perhaps by his assertion that he wants to let the Bush tax cuts expire for the wealthy. However, the wealthy have enjoyed these benefits throughout the course of the economic mess and the impact on employment seems to be rather clear. There is also the fact that corporations are, in general, doing amazing well. However, while many of them are “rewarding” their top people with bonuses, they are (with the notable exception of McDonald’s) not very inclined to hire people. This clearly is not due to a lack of money (as noted above, it has been a good year for corporations and their top people) and seems best explained in terms of corporate strategy rather than as an act of Obama.

Of course, the impact of the deficit on the economy is no myth and Obama (and congress) have to bear some of the blame for this. Until they show the political will needed to do what must be done, the economy will continue to be impacted by the deficit. That said, one reason why they need to have the will is because we make it hard for them to cut entitlements. As such, they have to be willing to stand up to us to do what must be done.

Obama has caved in to Republican demands too many times. It may be that he fears that being strongly assertive would brand him as an “uppity n—–.” He may be right; racism is still alive to some degree. More recently, he has shown some signs of acquiring enough backbone to resist caving in; I hope it continues.

The primary goal of some Republicans is not to do what is beneficial for the U.S., but rather, to defeat Obama. The Speaker of the House has explicitly stated that the main goal is to defeat Obama. That barely stops short of treason.

Cutting back on entitlements, including social security, would reduce demand by reducing the amount of money beneficiaries of entitlements have to spend. That, in turn, would tend to reduce hiring and employment. Things may not be quite that simple, but it’s something that should be considered and has not been.

MY fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.

For many years, our nation’s government has lived beyond its means. We have promised ourselves both low taxes and a generous social safety net. But we have not faced the hard reality of budget arithmetic.

The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security. They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embraced health care reform with subsidies for middle-class families.

But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.

Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.

Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.

If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.

Yet debt does not avoid hard choices. It only delays them. After last week’s events in the bond market, it is clear that further delay is no longer possible. The day of reckoning is here.

This morning, the Treasury Department released a detailed report about the nature of the problem. To put it most simply, the bond market no longer trusts us.

For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.

But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk. Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.

As economists often remind us, crises take longer to arrive than you think, but then they happen much faster than you could have imagined. Last week, when the Treasury tried to auction its most recent issue of government bonds, almost no one was buying. The private market will lend us no more. Our national credit card has been rejected.

So where do we go from here?

Yesterday, I returned from a meeting at the International Monetary Fund in its new headquarters in Beijing. I am pleased to report some good news. I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.

This loan comes with some conditions. As your president, I have to be frank: I don’t like them, and neither will you. But, under the circumstances, accepting these conditions is our only choice.

We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely.

We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.

We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.

We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.

We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.

We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.

AS I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.

If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.

What I wouldn’t give for a chance to go back and change the past. But what is done is done. Americans have faced hardship and adversity before, and we have triumphed. Working together, we can make the sacrifices it takes so our children and grandchildren will enjoy a more prosperous future.

Strange that there is no objection to clearly unnecessary and extravagant expenses.

We destroyed an energy efficient and economical railway system by encouraging driving private cars every place; we did that by building the Interstate Highway System. We built roads and encouraged urban development in ways that made public transportation impractical, forcing everyone to drive private cars, including even poor people who would have been better off if they had been able to use public transportation. We continue to do that and periodically add lanes to freeways in a futile attempt to reduce traffic congestion. All this has caused us to become ever more dependent on imported oil, a problem we were warned about decades ago but chose to ignore thereby creating serious economic and other problems.

The federal government subsidized the airlines with very lucrative air mail contracts further reducing efficient rail travel and causing us to import even more oil.

Now, instead of curbing wasteful spending, people advocate returning to the days when parents turned their children over to orphanages because they could not support them and older people often lived in abject poverty. But the situation for older people could become even worse because now they seldom have the option of living with their adult children as they commonly did in earlier times. So, social security and adequate pensions have become even more important.

Many families cannot afford health insurance, even when both husband and wife work. Apparently they are expected to let their children die if the children have expensive health problems and, if a parent dies, I guess that the family is expected to live on the streets as some families do in India.

When a patient lacks health insurance, hospitals charge more than for patients who do have insurance because patients lack the bargaining power that insurance companies have.

Obviously the drug companies have to make a profit to stay in business and develop new drugs. But they too often engage in unethical practices; they find ways to keep extended patent monopolies so that some expensive drugs stay expensive forever. Under the administration of George II, legislation was enacted prohibiting Medicare to bargain to keep drugs costs under control, the result being that Medicare was forced to pay far more for drugs than were private insurance companies. Doctors who own expensive diagnostic equipment, such as MRI scanners, order them to be used much more often than do doctors that do not own them, thereby unnecessarily running up health care costs.

Fortunately, there are decent people who are concerned for the less fortunate:

In theory, cutting the deficit would seem to be a simple thing:
1) Allow the Bush era tax cuts to expire.
2) Significantly reduce (or even eliminate) entitlement programs for those who do not, in fact, need the support.
3) Reduce defense spending to a level consistent with countering existing and likely threats.

Probably there are a significant number of people receiving entitlements who do not need them. I don’t see how there could be a rational objection to eliminating those entitlements. What does concern me is the push to eliminate all entitlements without using considerable discretion, i.e., assuming that all entitlements are simply a drain on the economy that cannot be justified. To me, it appears that some people who favor eliminating all entitlements are simply mean-spirited and advocate survival of the fittest.

Some people who depend on entitlements could become independent through additional training and education which would surely be a better solution than simply giving them money, but there are those who, through no fault of their own, could never be self-supporting.

Buried in the ocean of news regarding our three wars has been what I think is the biggest U.S. economic story of the year: the federal government’s lawsuit against Boeing, seeking to prevent the opening of its $2 billion factory in South Carolina, for which 1000 workers have reportedly already been hired (in case you missed the news altogether: story, story, story).

Whatever the ultimate decision in the lawsuit, the very existence of the dispute will change the business landscape here in the U.S. for the next decade or two. First, the fact that this happened to Boeing, a company with vastly more political power than average (you might say that it is practically an arm of the federal government itself) is significant. There are hardly any U.S. or foreign companies that can rely on similar influence. For a U.S. company, for example, the prospect that Boeing’s $2 billion investment might be effectively confiscated by the government will be one more reason to build the next factory in a foreign country. The U.S. government won’t be able to sue to prevent the startup of production in Mexico, Canada, China, etc. For a Chinese investor, for example, contemplating investing in the U.S., imagine the impact of the story. The Chinese investor has no political influence in the U.S., a tenuous grasp of American geography and language, and no hope of getting the ear of politicians who take calls every week from Boeing and its lobbyists. Given the vicissitudes of American politics and this unpredictable aggression against investors by government, the Chinese businessman is not going to finance the U.S. project unless it can deliver a rate of return comparable to what would be expected in other countries where there is a lot of risk from capricious governments (historically these have been Third World countries led by dictators or owned by families).

The Chrysler and GM bankruptcies already showed bond investors that the black letter law may not have as much to do with how their investment works out as the sentiments of politicians and bureaucrats in Washington, D.C. (link). Now the federal government is stirring up uncertainty among those who would directly operate factories in the U.S. How to price that uncertainty is going to be a huge challenge, but the price is certainly not going to be $0.